Verifying the Numbers
And playing around with returns

by Ann Coleman (TMF

Reston, VA (March 8, 1999) -- We blithely throw around return numbers for the Foolish Four strategy that are quite impressive. Twenty-four point five five percent annualized over the last 25 years is my favorite -- that's the latest Foolish Four return number when 1998 is included.

I wonder how many readers know where those numbers come from, how valid they are, and what they really mean.

You aren't just taking my word for it, are you?

The returns that I and others quote here come from a spreadsheet that we have developed over the last 4 years and make available in FoolMart to those who are interested.

First, though, please don't take this as a long ad for the spreadsheet. While we definitely like to sell copies -- and it is a very valuable database that required hundreds of man hours to assemble -- our primary reason for selling it is to allow anyone who wants to, and who is familiar with spreadsheets, to verify our numbers and techniques.

I realize, of course, that there is an element of trust in all of the numbers we put forth. Usually when I read an investing book, I am amazed that there is so little verification offered for the numbers quoted. I don't know of any that offers its readers access to the raw data and lets them check the book's claims for themselves. How Foolish that would be! (And, to give the writers credit, how incredibly expensive to print and boring to read it would be!)

With our spreadsheet, you don't have to take our word for it, you can see for yourself. It is a fairly sophisticated spreadsheet, so it's not for everyone, but anyone with Excel 5.0 or higher can open the spreadsheet and see how each strategy worked each year. Those who are spreadsheet-adept can verify our formulae and even create and test strategies of their own.

Those of you who are not inclined to question the validity of using the geometric average return vs. the arithmetic average return, and who are not equipped to debate the various ways we could have handled the AT&T (NYSE: T) breakup or to dispute the special dividend that DuPont (NYSE: DD) declared in 1964, can take comfort knowing that other Fools have done so. And the spreadsheet has gotten better and more accurate every year from this process.

So what about that 24.55% return? That number is the average annual return that an investor would have received had he invested in the Foolish Four stocks starting January 2, 1974 and followed the strategy exactly through the close of trading on January 4, 1999. It compares with a return of 15.03% for the Dow and 14.93% for the S&P 500 over the same time period.

Tomorrow: What, exactly, do those numbers mean?

Would you work for a bunch of Fools?

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Foolish Four Portfolio Archives »  

Today's Stock Lists | 1998 Dow Returns

03/05/99 Close
Stock  Change   Last
CAT  -   1/4   49.63
JPM  +1        115.56
MMM  -   1/4   76.88
IP   +  11/16  41.06

                   Day   Month    Year   History
               FOOL-4   +0.34%   3.74%   4.79%   6.35%
        DJIA     -0.09%   4.52%   6.10%   5.68%
        S&P 500  +0.57%   3.59%   4.67%   4.92%
        NASDAQ   +2.59%   4.79%   9.35%  10.85%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     49.63    15.19%
 12/24/98    9 JP Morgan    105.51    115.56     9.53%
 12/24/98   14 3M            73.57     76.88     4.49%
 12/24/98   22 Int'l Paper   43.55     41.06    -5.71%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1191.00   $157.00
 12/24/98    9 JP Morgan    949.62   1040.06    $90.44
 12/24/98   14 3M          1030.00   1076.25    $46.25
 12/24/98   22 Int'l Paper  958.12    903.38   -$54.75

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4253.99